ISDA Compares U.S. and EU Derivatives Trading Regulation
In a paper comparing derivatives trading frameworks in the United States and the European Union, ISDA encouraged regulators to focus on "broad outcomes" in making comparability determinations.
Titled "Principles for US/EU Trading Platform Recognition," the paper encourages U.S. and EU regulators to "establish clear and comprehensive" regimes to facilitate the mutual recognition of trading venues. Given the CFTC's current derivatives trading regime and the EU's efforts to implement one, ISDA urged the CFTC to (i) utilize the principles outlined in the final report by the IOSCO Task Force on Cross-Border Regulation in order to "recognize the broad commonalities between the U.S. and EU regimes, rather than focus on technical differences between the underlying rules;" and (ii) where those principles are satisfied, exempt EU trading venues from swap execution facility ("SEF") registration and allow market participants to satisfy the mandatory trading requirement in CEA Section 2(h)(8) by trading on an EU trading venue regardless of whether or not they are "U.S. persons."
ISDA Chief Executive Scott O'Malia remarked that the paper's "analysis shows there are many similarities between the SEF rules in the U.S. and MiFID II/MiFIR in the EU, which will hopefully pave the way for the recognition of EU platforms. However, a lack of recognition could lead to fragmentation between U.S. and European markets."
Commentary
The CFTC's initial results for the cross-border recognition of SEF trading have not been great. As the ISDA paper notes, CFTC staff's no-action relief for EU trading facilities has not been used because the approach taken in that relief was too prescriptive. Instead, many EU-based facilities have created separate registered SEFs to accommodate U.S. persons. The impact of the CFTC's approach will be magnified when a trading mandate is implemented in Europe, since much larger sources of liquidity will be walled off to U.S. participants.
In addition to presenting a practical method for dealing with that concern, the ISDA paper provides a useful table that compares and analyzes derivatives platform trading requirements in the United States and European Union. It will be interesting to see how U.S. and EU regulators resolve the cross-border recognition of trading platforms, given the challenges posed by that undertaking and a process that spanned years before leading to a different agreement on the recognition of central clearing counterparties.
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